China’s Unlikely Rival: Japan

April 12 (Bloomberg) -- Of all the nightmares Chinese
President Xi Jinping figured he would have to face, a resurgent
Japan Inc. surely wasn’t among them.

A major slowdown in the Chinese economy? Yes. Social
instability? Absolutely. Debilitating pollution? Check. Rampant
corruption eating away at the Communist Party’s legitimacy? You
bet. An economically vibrant Japan emboldened to challenge China
for leadership in Asia? Hardly. With an assertive Shinzo Abe at
the helm, though, Japan may be poised to do just that, in ways
that could upend the dynamics of Asia’s future.

The emphasis here is on “may.” For all the excitement over
“Abenomics,” it’s still a vague and unimaginative blueprint to
end Japan’s 20-year funk. Still, let’s say the optimists prove
right and Abe ends deflation and restores Japan’s economic clout
in the region. It’s doubtful that the steady, “peaceful” rise to
dominance envisioned by China includes sharing power with a
renascent Japan. The Japanese recovery the world has long sought
could well make Asia a much more dangerous place.

This is the minefield into which John Kerry will wander as
he embarks on his maiden trip to Asia as U.S. secretary of
state. In Seoul today, Kerry will grapple with North Korea’s
threats and try to reassure a key U.S. ally. In Beijing and
Tokyo after that, he will encounter Asia’s budding Cold War
firsthand.

Love Fest

Kerry’s Beijing stop will be contentious as he prods
Chinese officials to rein in North Korea’s Kim Jong Un, revise
currency policies that Washington deems unfair, and shut down an
army of hackers attacking computer networks around the globe.
Tokyo will be a love fest, with Abe keen on strengthening the
U.S.-Japan alliance. The contrast won’t be lost on Xi, who just
began his 10-year term as Chinese leader.

The yen’s 22 percent plunge against the U.S. dollar over
the past six months, a drop that began with Abe’s candidacy, is
bad news for Chinese exporters. While China’s economy is bigger,
Japan’s still generates $5.9 trillion worth of output and
features a stable of globally active technology, transport and
pharmaceutical companies. Amid weak global growth and rising
Chinese wages, a more competitive Japan could reclaim the
export-market share that China now takes for granted. By opening
the monetary floodgates as never before, Abe’s new Bank of Japan
chief, Haruhiko Kuroda, could push the yen much lower still.
China might even feel compelled to devalue the yuan, which would
enrage the U.S.

Even more than Japan’s gross domestic product, though, the
confidence that a recovery would lend to Abe, who has never
forgotten his nationalist roots, is something that Xi should
fear. The optimism the Japanese prime minister has managed to
generate with his policies has driven his approval ratings into
the 70 percent range. His Liberal Democratic Party seems headed
for a big win in upper-house elections in July.

Once secure in his premiership, Abe may well rediscover his
obsession with creating a “Beautiful Japan.” That’s the catchall
phrase that Abe trotted out early in his first stint as prime
minister in 2006. The euphemism encompasses a wide range of
controversial policies -- from downplaying or denying Japan’s
atrocities during World War II, to inserting more patriotism
into school curriculums, rewriting Japan’s pacifist postwar
constitution and generally flexing muscles in Asia.

Stiffening Spine

It’s hard to exaggerate how devastated the political
establishment in Tokyo was to see China’s economy surpass
Japan’s in 2010. That Japan shares the same credit rating as
China is a deeply sore point for the conservative lawmakers who
make up Abe’s LDP. Abe is anxious to restore the pride drained
by two decades of economic stagnation, and in the postwar period
before that. Visiting Washington in February, he pledged to
“bring back a strong Japan.” He went even further in a speech to
the U.S. foreign-policy establishment: “Japan is not, and will
never be, a tier-two country,” he declared ominously.

Anyone who thinks this process will go smoothly is
dreaming. “This could be destabilizing in the region and further
undermine prospects for improving relations,” says Jeff
Kingston, the head of Asian studies at the Tokyo campus of
Temple University.

It also would complicate U.S. President Barack Obama’s
pivot toward Asia. No economic relationship is more important
than that between the U.S. and China, the “Group of Two.” Yet no
friendship in the region matters more to Washington than its
bond with Tokyo. A sustained period of heightened acrimony
between China and Japan, already at odds over disputed islands,
means even less cooperation on trade, currencies and security.
An emboldened Japan would be more prickly about outside advice,
including from the U.S. Worse, it could overplay its hand,
nudging its American ally into a confrontation with nuclear-armed China.

There’s plenty of blame to go around, of course. China’s
periodic displays of great-power vanity raise hackles throughout
Asia. Its heavy-handed approach to territorial disputes and
trade has undercut efforts to develop a more stable regional
consensus and institutions like those that ended conflict in
Europe after World War II. If a crisis develops in Asia, leaders
really have nowhere to go to settle disputes and step back from
the brink.

Even if China’s new leader wanted to strengthen ties with
Japan, a plethora of domestic challenges may limit his
maneuvering room. Xi must address official corruption, a
widening gap between rich and poor, an increasingly activist
media and pollution that’s choking Beijing. As problems mount,
there will be a natural inclination to lash out internationally.
Japan, China’s wartime colonizer, is an obvious target. Ceding
ground to Tokyo would be devastating for Xi’s standing in
Beijing.

Truce Time

China and Japan must be careful not to back each other into
a corner. Both nations should keep economics and politics as
separate as possible. They should agree to regularly scheduled
summit meetings, as do Beijing and Washington. Pledging to
increase bilateral financial and trade ties would help ensure
economic interests survive any geopolitical differences. Also,
it’s time to decide on a framework to negotiate a truce
involving a group of islands that Japan calls Senkaku and China
calls Diaoyu.

As Kerry traverses the region this weekend, he’s sure to
seek some kind of diplomatic mechanism for scaling down tensions
on the Korean Peninsula. He should worry just as much about
reconciling the ambitions of North Asia’s two giants, before the
region faces a true nightmare.

(William Pesek is a Bloomberg View columnist. The opinions
expressed are his own.)